«high aspirations, sound foundations: a discussion report on the centre-ground case for building 100,000 new public homes By John Healey MP THE SMITH ...»

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Source: UK Housing Review, DWP administrative data For some commentators the only answer to this trend is to declare that housing benefit spending is ‘unaffordable’. So is it? The best measure of what a country can afford is to express spending as a proportion of the country’s national income, or GDP.

While there was a steep rise in housing benefit spending in the 1980s and early 90s, the facts show that since then expenditure as a proportion of national income has broadly risen and fallen with the economic cycle – rising in the downturns after 1992 and 2008, but falling in the intervening period. Departmental projections are for falling expenditure over 9 See figure 4 for sources. In-keeping with the responsibilities of the Westminster government, the housing investment figures are for England-only, the housing benefit figures are for Great Britain.

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But even this response misses the bigger point: simply cutting housing benefit is just blaming the canary rather than making good the mine.

The charge against housing benefit spending is less that it’s unaffordable and more that it’s inefficient.

There’s a much more cost-effective way of using the public money we currently spend on housing benefit to deal with the root causes of high spend, not just addressing the symptoms.

A brief history of when, and why, housing benefit has risen shows this to be the case.

Housing benefit hasn’t risen at a uniform rate. Setting out the record of political administrations of the last 35 years on housing benefit shows this to be the case, and runs contrary to much perceived wisdom.

As figure 5 shows, it was the Thatcher and Major governments who added the most to the housing benefit bill - over £13bn in real terms and an extra 1.3m claimants. The Blair/Brown

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governments compare much more favourably, even given the impact of the recession and subsequent downturn after 2008. The number of claimants fell over the 13 years of Labour government by almost 200,000, and by more than 700,000 before the crash.

Given varying lengths of time in office, it is instructive to compare the annual change in housing benefit spending. The findings here re-enforce this message. Huge rises in the 80s and early 90s equate to an astonishing average real year-on-year increase of 9% during the Thatcher/Major period. By contrast, the Blair/Brown years saw an average increase of only 2% despite the crash.

Bringing the analysis up to date, the housing benefit bill has risen faster under Cameron than under the last Labour government, on the most recent official data.

Table 1: Housing benefit caseload and expenditure under different administrations

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To better understand why these changes have occurred we need to first understand who the claimants are.

Most housing benefit claimants (61%) are recipients of other low-income benefits and as a result ‘passported’ on to housing benefit. The largest passported groups are pensioner households receiving the guarantee credit element of pension credit (19% of all claimants) and households receiving disability benefits (23%). Less than one in 10 (8%)

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claimant households are receiving jobseeker’s allowance – the main out of work benefit.

One of the most striking recent changes has been the growing number of people who claim housing benefit despite being in work.

The number of working families claiming housing benefit more than doubled between 2009/10 and 2014/15 and now stands at over 1.1 million – the highest number since comparable records began.10 Figure 6: Working households claiming housing benefit Working households claiming housing benefit 1,200,000 1,000,000 800,000 600,000 400,000 200,000

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Source: DWP administrative data, via Stat-Xplore Most in-work claimants rent privately, but overall it still remains the case that a greater number and proportion of housing benefit claimants live in the social rented sector – inevitable given that increasingly public rented homes are only available to those on the very lowest incomes. In total some 3.3m families claim housing benefit in council and housing association homes, compared to 1.6m in the private rented sector.

10 Even these statistics are likely to underestimate the number of in-work recipients given that benefits such as income support and JSA allow recipients to work a small number of hours and retain eligibility.

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Across the country, big differences in local labour and housing markets means there is a significant divergence between housing benefit spending. The average housing benefit award in London is a third higher than even the South East and almost double the average award in the North East. Around £6bn, or more than £1 in every four, of total housing benefit expenditure is in London.

This divergence largely reflects the big geographical differences in social and private rent levels, which is also mirrored in the stark contrast in house prices between London and the rest of England.11 So why has housing benefit expenditure grown so significantly over the last thirty-five years?

By disaggregating the Department for Work and Pensions’ administrative data we can assess the contribution of the two proximate causes of increasing expenditure - higher award per claimant and higher caseload of people claiming.

The chart below shows that since the late 1970s, around two-thirds of the increase in expenditure has been due to the higher amount claimed, with around one-third due to a higher number of families claiming housing benefit.12

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66% Source: DWP administrative data; House of Commons Library and author’s calculations 11 See Smith Institute’s report ‘The great house price divide’ (2013) 12 This calculation, which was undertaken by the House of Commons Library, uses annual housing benefit award and caseload administrative data to assess the relative contribution of each to overall spending. A small residual where a change in spending is the result of a combination of caseload and award has been added to the award category.

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To dig deeper into what has happened over time, it is worth breaking this down again by political administration, and by private and social sector. Due to data limitations, before 1995, housing association tenants are grouped together with private rented tenants.

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Source: DWP administrative data and author’s calculations We know that expenditure increased dramatically over the period of the Thatcher/Major governments. In the early 1980s this was largely as a result of a sharp recession increasing the number of claimants.

But the steepest sustained increase in expenditure occurred from the late 80s to the mid 1990s, with a ‘perfect storm’ of social rent hikes, private sector rent deregulation followed by the recession of the early 1990s. This meant almost a million additional people claiming housing benefit, at a much higher award level. And compared to previous recessions there was much less capacity in the social rented sector to absorb increased demand.

As suggested by the ‘local authority award’ column perhaps the biggest net contributor to higher housing benefit spending was higher public rents. Average social rents almost tripled during the period 1980-90. And under John Major, the government pursued a policy of social rent increases well above inflation, averaging over 4% in real terms until 1996.13 13 Malpass and Murie (1999) Housing Policy and Practice, p. 177

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Source: DWP administrative data and author’s calculations Falling unemployment and rising living standards in the late 1990s and early 2000s meant a significant fall in the number of people claiming housing benefit in that period, and a reduction in overall spending. However, housing benefit began rising once more by the middle of the 2000s, again mainly due to high rent inflation not just in the social sector but the private rented sector too. Spending increased sharply after the 2008 crash as a result of higher unemployment.

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The sharp increase in caseload as a result of the global recession and downturn continued after 2010, with the private rented sector absorbing the majority of new claimants. Since then, big cuts to housing benefit, and the rise of in-work families claiming only partial housing benefit to top up their wages has depressed the average private sector award.

However, this has been more than outweighed by rising social sector rents, and the rising number of people on low incomes living in the private rented sector.

There are a number of important lessons that emerge from this analysis. First, it’s clear that rising housing benefit has gone hand-in-hand with the retreat of a public role in building new social homes. The huge and unprecedented rise in housing benefit spending during the 1980s as public investment in homes was being cut back and right to buy introduced is particularly stark.

Second, many of those who claim housing benefit are on disability benefits, or are pensioner households. For many of these households, their income is effectively fixed, and the prospects of them earning more in wages will be remote. So just controlling housing benefit by cutting their entitlements is simply punitive.

Third, the problem of high housing costs not met by household income is increasingly a problem for working as well as out of work households. Any solution to the high cost of housing benefit must cater for these households too.

Fourth, it is unsurprising to see that spending on housing benefit is weighted towards those areas where housing costs and housing need is the most acute, particularly London. It is here that most urgent attention is needed.

Fifth, the effect of lower public investment leading to higher numbers of claimants in the private rented sector is only one part of the story. The other is that a big driver of housing benefit spend in the recent past has been lower investment leading to higher rents, and so higher housing benefit awards in the social sector.

This, then is the problem. The next section looks to see how it could be solved.

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Invest to save: how could we build 100,000 affordable public homes?

Not only has housing benefit spending risen dramatically over the last 35 years, it is also set to go on rising. Using OBR long-term forecasts and assumptions about award and caseload change over time, we project that on current trends total annual spending on housing benefit of around £45bn in thirty years’ time in today’s prices. The majority of this will be spent on tenants in the private rented sector. This is almost double the spending forecast for the end of this Parliament.

Reducing the spiralling cost of supporting people in private rented homes by providing affordable public housing offers a better way forward. The long term savings could be substantial, with those on low pay better off too. And because social landlords recycle their surpluses, rather than take them as profit, the public money we spend goes further.

Figure 10: Long-term housing benefit projection Source: OBR fiscal sustainability report and author’s calculations (see appendix for further details) To his credit, Labour’s previous leader Ed Miliband was acutely aware of the long-term problem of a rising housing benefit bill. In a speech in June 2013, he rightly said: “Today the welfare state, through housing benefit, bears the cost for our failure to build enough homes.

We can’t afford to pay billions on ever-rising rents, when we should be building homes to

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bring down the bill. It’s time to tackle this problem at source”.

In 2014, Ed commissioned me to do some private work on how we could use the power government has over housing and labour market policy to bring down the housing benefit bill, and build more homes at the same time.

Working with PricewaterhouseCoopers, I developed a detailed long-run financial model of housing benefit to enable us to assess the impact of various policy options including boosting the supply of public homes. The results below are drawn from elements of that project.

The 2010-15 Parliament Before moving on to look at what a committed government could do in this Parliament, it is important to first look at some of the very big retrograde changes made in the last Parliament, which must not be left unchallenged.

Two big changes stand out.

First, while the main cut to housing benefit for social sector tenants – the ‘bedroom tax’ – received the most press and political attention in the last Parliament it was the cuts to housing benefit in the private sector that could have the most significant long-term impact.

Of the eleven separate cuts to housing benefit made in the last Parliament, the majority only affected the private rented sector. And of these cuts, there is one technical change in particular what has very serious long-term consequences - the move to uprate housing benefit for private sector tenants by the Consumer Price Index (CPI) measure of inflation, rather than by local rents.

This decision to change how housing benefit for private tenants is calculated has lead to the perverse situation where a social security benefit that is meant to help with a families’ housing costs no longer tracks changes in the very costs it is meant to be meeting.

Research by Shelter suggests that the short-term impact will be severe – with less than 10% of properties available to tenants in high-demand areas like London and Manchester, and less than 30% in most of the rest of the country by 2017.14 Our modelling suggests that if left unchecked, the long-term effect will be extremely severe, with rapidly growing 14 See Shelter (2015), ‘What can 1.4m renters expect from the next round of welfare reforms?’ http://blog.shelter.org.

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